Since 24 February 2022, the US, EU, UK, and their allies have continued to impose heavy financial and trade sanctions on key sectors of the Russian economy, as well as individuals and entities close to Vladimir Putin. The new designations—alongside sanctions imposed by generally neutral parties such as Switzerland—show that a consistent and coordinated approach by the NATO countries and their allies can threaten the stability of the Russian economy. The breadth of restrictions may also signal a new paradigm in the use of sanctions as a tool of economic pressure, particularly those relating to the removal of several Russian financial institutions (FIs) from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network.
Since the publication of our last client alert, the US, EU, UK, and their allies have significantly increased the pressure on the Russian government in response to the ongoing invasion of Ukraine. Unlike the restrictive measures put in place after the annexation of Crimea in 2014, the new measures have the potential to threaten the stability of the Russian economy and the regime. By cutting off the Russian Central Bank’s access to much of Russia’s foreign reserves and banning FIs from the SWIFT network, the allies are effectively weaponizing macroeconomic policy through their restrictions on financing, resourcing, and technology.
In the week following 24 February 2022, there has been a significant escalation of sanctions against Russia, including a ban on the use of the SWIFT network by certain Russian FIs; asset freezes and restrictions on the operation by Russian FIs of key financial markets; and commercial and travel restrictions. These measures prompted the Russian government to impose considerable restrictions on its economy, including a local ban on transferring foreign currency abroad and ordering exporters to exchange 80% of their foreign currency proceeds for the Russian ruble.
The SWIFT Ban
On 2 March 2022, despite initial resistance from some European countries due to their dependence on Russian oil and gas, the EU announced seven banks, including VTB and Bank Rossiya, had 10 days to wind down their operations on the SWIFT network. The exclusion from SWIFT presents the most significant escalation against Russia following its invasion of Ukraine, creating serious challenges to Russian businesses and the government by effectively disconnecting these FIs from the global financial system.
Enhanced Sanctions and Prohibitions from the US
US Treasury Office of Foreign Assets Control Sanctions Russian Government Officials
On 25 February 2022, the US, in conjunction with its allies, issued targeted blocking sanctions on Russian Federation President Vladimir Putin, a rare designation and action from the US Treasury. Additional sanctioned Russian government officials include the Minister of Foreign Affairs, Sergei Lavrov, the Minister of Defense, Sergei Shoigu, and Chief of the General Staff of the Russian Armed Forces, Valery Gerasimov, for their direct responsibility and involvement in the invasion of Ukraine.
Sanctions Against the Russian Central Bank, Ministry of Finance, and Sovereign Wealth Fund
On 28 February 2022, the US also imposed sanctions on the Russian Central Bank, the country’s finance ministry, and its sovereign wealth funds. The move effectively restricted Russian access to much of its foreign reserves, a war chest of $630 billion, and further restricts Russia’s ability to raise additional capital to finance its war efforts. To ensure the newly issued sanctions are effective, and circumvention efforts are thwarted, the Office of Foreign Assets Control (OFAC) issued multiple Frequently Asked Questions outlining specific public guidance for compliance with the Russia-related sanctions and prohibitions.
Belarus’ Support of Russia and the Invasion of Ukraine
The US Department of Commerce, Bureau of Industry and Security, and OFAC have each issued sanctions on Belarus due to its support of Russia’s invasion of Ukraine. Additional measures include expanded end-user controls specific to Belarus, as well as a reduction in available license exceptions for encryption items. In addition, OFAC sanctioned 24 Belarusian individuals and entities, targeting sectors closely linked to Russia. Specifically, the designations include Belarusian state-owned banks, Belarusian defense and security industry firms/organizations, and Belarusian defense officials.
The UK Emboldens its Approach
Since 24 February 2022, the UK has issued multiple new sanctions targeting sectors of the Russian economy, as well as those considered close to Vladimir Putin. The new measures, described by UK Prime Minister Boris Johnson as “the largest and most severe package of economic sanctions that Russia has ever seen,” include:
Restrictions prohibiting financial transactions involving the Russian Central Bank, the National Wealth Fund, and the Ministry of Finance.
Prohibition on dealing with securities or money market instruments issued by, or providing loans/credit to, any individual or entity connected with Russia or the Russian government.
Prohibition on designated banks from accessing sterling and clearing payments through the UK.
Prohibition on establishing or continuing correspondent banking relationships to, from, or via, a “designated person” or a credit or financial institution owned or controlled by them.
Asset freezes against Russian banks, including VTB Bank, which holds an estimated £154 billion in assets in the UK.
Trade restrictions relating to the export of key high-end and critical technical equipment and components in sectors including electronics, telecommunications, and aerospace.
Banning Aeroflot and aircraft with a Russian flag or ownership from using UK airspace.
Asset freezes on numerous individuals and entities, including Vladimir Putin, Sergei Lavrov, all deputies of the Russian Duma, as well as numerous politicians, military, and business associates close to Putin.
On 3 March 2022, the London Stock Exchange also suspended the listing of 27 firms “with strong links to Russia,” including Gazprom and Sberbank.
The EU also Increases the Pressure in Coordination with its Allies, Old and New
In addition to the SWIFT ban, the EU on 25 February 2022 decided to sanction Vladimir Putin and Sergei Lavrov, as well as individuals on Russia’s National Security Council and all members of the Duma. The EU also imposed significant restrictions on the Russian financial, oil and gas, and transportation sectors. Later, on 28 February 2022, the EU imposed a ban on transactions with the Russian Central Bank, additional sanctions on entities and individuals and, similar to the UK, a ban on aircraft with a Russian flag or ownership from using EU airspace.
Finally, Switzerland, which had not previously been involved in the pressure campaign, broke its longstanding neutrality policy on 28 February 2022, when it implemented the same sanctions imposed by the EU on 23 and 25 February 2022 against Russian individuals and companies. Switzerland also closed its airspace to all flights from Russia.
What Happens Next?
The resolve of the NATO allies in the face of Russia’s invasion of Ukraine shows no sign of abating. Despite initial reluctance by many nations—particularly in Europe—over the impact of sanctions on their own economies, public pressure has resulted in an unprecedented sanctions effort against Russia that will likely increase. Moreover, signals coming from a recent meeting of ministers of foreign affairs of G-7 nations suggest additional sanctions on the Russian government and economy. As the sanctions against Russia come into force globally, the next few weeks will demonstrate the true impact of the restrictions on the Russian economy and the country’s ability to withstand its growing exclusion from global markets.
What This Means for You
Russia’s invasion of Ukraine poses multiple new challenges to companies. In addition to ongoing reviews of their activities to understand sanctions exposure to Russia, Belarus, and the separatist regions, the last week showed that FIs should also look at their Transaction Monitoring (TM) programs. FIs should proactively review their correspondent banking, payments, and settlement relationships to identify any newly designated persons among their customer base or any other form of exposure, and adequately report them under local rules.
What You Should Start Doing/Key Considerations
Guidehouse can rapidly review changes to sanctions regimes and lists, and assess an FI’s exposure to newly designated persons. We can also review and assess your OFAC compliance program to determine whether it is sound, to identify gaps or weaknesses, or to conduct training on sanctions compliance.
Guidehouse’s experienced sanctions and TM systems specialists can also help support and test any required changes to systems and controls. Guidehouse can identify further enhancements through system tuning and advise on optimal solutions to improve efficiency. Our team has in-depth knowledge of the regulatory environment in the US, UK, Europe, and globally, and best practices operated by financial institutions. Services include:
An assessment of the new list format to determine whether individual rules require updating. This assessment will be conducted through a review of the bank’s data, sanctions policy, and regulator expectations.
Data Mapping in cases where the list format changes impact internal list management processes.
Hit-rate reduction through rules calibration.
System configuration and testing.
Updating policies and procedures.
In addition, experience in Managed Services spans Financial Crimes Compliance, Know-Your-Customer Support, Transaction Lookbacks, Financial Intelligence Unit (FIU) Support, Transaction Reviews, and Suspicious Activity Report (SAR) Alert Processing for financial institutions. Our seasoned compliance and business process outsourcing professionals integrate leading-edge technologies when adopting the newly optimized processes to drive quality, tighten accuracy, and maximize efficiency. Our Managed Services team can quickly help supplement in-house compliance programs to assist with any new requirements, including backlogs or increased volumes of alerts/investigations in the areas of:
Know-Your-Customer, Customer Due Diligence, and Enhanced Due Diligence Reviews.
Negative News Reviews.
Sanctions and Name Screening Reviews.
Call to Action
Guidehouse financial crime consultants work with FIs of all sizes to build effective and efficient risk management and compliance frameworks to help clients protect against legal, fiduciary, shareholder, and reputational risk. Guidehouse experts include distinguished former prosecutors, regulators, compliance officers, and consultants, who leverage their combined experience to help clients conquer their compliance challenges.
Special thanks to Jeremy Robb and Aimie McLellan for contributing to this article.